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If the Compliance Software Can't Catch a Sanctioned Client, That Means a Fine

U.S. Treasury Department in Washington, D.C. Photo: Diego M. Radzinschi/ALM

Virginia-based electronics maker Cobham Holdings Inc. has received a nearly $90,000 lesson from the U.S. Treasury Department’s Office of Foreign Assets Control about the dangers of relying too heavily on third-party screening software to detect compliance-related issues.

Trade lawyers said the case presents a cautionary tale for other companies that may be similarly relying on automated screening without additional vetting procedures.

Cobham agreed Nov. 27 to pay $87,507 to settle potential civil liability over three shipments of electronics to a Russian entity that was 51 percent owned by a company that OFAC had blocked under the Ukraine-/Russia-related sanctions program.

Cobham’s now-former subsidiary, Metelics, allegedly used Russian and Canadian distributors to send thousands of switches and switch limiters and a few silicon switch limiter samples with a total value of more than $745,000 to an entity called Almaz Antey Telecommunications LLC in Russia. Cobham discovered the situation while it was in negotiations to sell Metelics and a buyer raised a red flag about the first shipment of switches, according to OFAC.

Cobham did not immediately respond to a request for comment.

OFAC found that Metelics’ director of global trade compliance approved the three shipments, which were made between July 2014 and January 2015, when AAT was not named on OFAC’s list of "Specifically Designated Nationals and Blocked Persons." But that list included Almaz-Antey, which owned 51 percent of AAT at the time and had been blocked by OFAC—meaning that Metelics shouldn’t have been sending electronics to AAT.

Cobham later determined that its screening software failed to flag the transactions because the company had searched for “Almaz Antey Telecom,” rather than “Almaz Antey,” according to OFAC. The agency reported that the software was looking for exact matches of all the words in the search string, even though Cobham said it had set the search criteria to detect partial matches.

“That’s a painful one,” said Ron Oleynik, a partner at Holland & Knight’s office in Washington, D.C. He heads the firm’s international trade practice.

If companies want to avoid compliance issues slipping through holes in their software safety nets, they should avoid relying too heavily on one system, Oleynik said. Using a so-called “fuzzy” search to detect partial matches is a good starting point. But the results can be refined by subsequently using an exact search for the most unique term in a company’s name to determine whether it’s on OFAC’s naughty list.

“OFAC’s lists are filled with all sorts of misspellings. They may be transliterations from Arabic characters or Russian Cyrillic alphabet. If you’re doing an exact match, it’s got to be perfect. Every comma, inc. and period,” Olyenik said. “But you can boil it down to the least common denominator: the unique name of the company. If it’s Starfish Company Limited, search only for ‘Starfish,’ and see what comes up.”

He added that companies or their software providers can also tailor searches based on transaction size or type by, for instance, setting a certain dollar amount to trigger a more thorough search, possibly carried out by a human.

The primary takeaway is that companies have to be more vigilant about ensuring that they’re not involved in transactions with blocked entities. Entering a long string of text into search software and taking the results at face value isn’t always going to be good enough.

“That’s the ostrich with its head in the sand,” Oleynik said.

Cobham had faced a maximum penalty of $1.9 million. But OFAC noted in the settlement announcement that the company was now using new screening software alongside a “screening and business intelligence tool ... to conduct enhanced due diligence on high-risk transactions from an OFAC sanctions perspective.”

Members of the economic sanctions and anti-money laundering team at Paul, Weiss, Rifkind, Wharton & Garrison wrote in a post about the case that it appeared to be the second time that OFAC has settled an enforcement action that centered on a transaction with an entity that was not on the blocked list but still blocked by the so-called “50-percent rule.”

The Paul Weiss attorneys suggested that OFAC might have pursued the case against Cobham, at least in part, because of the similarities between the name of the blocked company and the entity it owned: Almaz-Antey and Almaz Antey Telecommunications.

“More broadly, OFAC’s action based on the 50% rule highlights the need for companies, at a minimum, to understand the ownership structure of their customers, particularly when such counterparties are operating in a high-risk jurisdiction (such as Russia),” they added.